The compliance costs associated with the Dodd-Frank Act, the Patriot Act, the Federal Reserve’s Comprehensive Capital Analysis and Review and other regulatory constraints are high. Those costs, combined with the longest stretch of low interest rates in modern history and overheated real estate markets, have made it more difficult than ever for traditional banks to lend to real estate investors, developers and small-business borrowers.
Additionally, banks — the traditional source of construction capital — in many parts of the country are offering smaller loans compared to the cost of development, when they offer to lend at all. As a result, literally hundreds of alternative lenders have rushed into the market to provide financing options for the borrowers left behind by traditional banks.
As a commercial mortgage broker serving as an intermediary for alternative lenders, you can benefit tremendously from this shortfall in bank-financed deals by offering borrowers a quicker time to fund, with fewer constraints. According to a recent Wall Street Journal article, private lending has more than doubled in size over the last decade, surpassing the growth of public stocks and bonds. In addition, since 2016, the U.S. Small Business Administration (SBA) estimates that 80 percent of small-business loan applications have been rejected, leaving plenty of space in the market for alternative lenders to play a major role.
Alternative lending options (which include private lenders, online lenders, crowdfunding and peer-to-peer lending) have increased dramatically since the Great Recession. As a mortgage originator, finding ways to effectively tap into this expanding source of financing can help to bring plenty of new business opportunities your way in an increasingly competitive market.
Because alternative lenders are not subject to many of the regulatory mandates that banks face, they can deliver many valuable features not generally offered by banks. For brokers, advertising the many value-add opportunities available through these alternative financing sources will help entice borrowers in need.
Speed is among the perks typically available through alternative lenders. Generally, you can expect a fast “yes” or “no” decision on your loan application. Most private lenders have small loan committees, typically two or three members who meet several times a week. This means, in many cases, a loan decision can be made within 48 to 72 hours. What borrower doesn’t want a fast response to a request for financing?
Once a private lender decides it is interested in making a loan to a prospective borrower, the lender can generally issue a term sheet within a week or two. Banks can take months to decide whether or not they are even interested in making the loan in the first place. That can be a lifetime for a small business.
In addition, many private lenders have cash on hand that is available to be quickly deployed for a borrower’s immediate use — if all of the required due-diligence materials for underwriting are available without delay in an accurate and organized digital format. Speed is one of an alternative lender’s biggest assets. As a rule, it is the borrower who impedes the process by not being sufficiently ready and organized with the materials the alternative lender’s underwriting team needs to conduct due diligence, which significantly increases the time frame for transferring capital to the borrower.
Less red tape
If a bank is offering 60 percent loan-to-value (LTV) financing, chances are that a private alternative lender is likely going to be offering 70 percent and up to 90 percent LTV. This advantage to the borrower in having less skin in the game can be enticing, because it enables them to do more with their own capital.
Traditional banks also can be very particular about a borrower’s credit score, time in business, cash flow status and/or expertise in the business or real estate development for which funds are being sought. Those items are far less relevant to many private alternative lenders, which determine the level of perceived risk they’re willing to accept by understanding the value of the collateral that will protect them in the event of a default.
“ Many borrowers aren’t in a position to get a bank loan, but they may well be perfect candidates for an alternative lender. ”
Because banks are heavily encumbered by numerous restrictions and regulations, substantially more is required of their borrowers — such as proving they are hitting sales numbers, keeping margins at a certain rate and that they haven’t lost any key customers. Private alternative lenders generally demand substantially less from borrowers and are simpler to deal with — from the perspectives of reporting, financial ratios, insurance requirements, equipment maintenance, permitted business lines and client concentrations.
Path to growth
Lending decisions made by traditional banks are often constrained by regulations, such as the Dodd-Frank Act, which stipulates that banks should not concentrate too much capital in loans in any particular asset class, for example. Private alternative lenders generally face far fewer restrictions and can lend as much capital as they wish across multiple industry sectors, such as multifamily real estate, the aviation industry or single-customer businesses.
Unlike traditional lenders, alternative lenders do not require a borrower to open a bank account with them or to fund that account with a certain dollar amount. Alternative lenders also may not have a bricks-and-mortar presence in the towns, cities and states where they make loans. In addition, alternative lenders can determine their own schedule for when and how a loan is repaid, which can reduce the monthly payment required for payback.
Along with generally being easier to work with than traditional banks, as well as providing borrowers with better loan-to-value ratios, alternative lenders also are cheaper in the long run than taking on an additional partner or investor. Who wants to give up ownership when they can avoid it?
These financing perks represent just a few of the benefits that alternative lending offers borrowers and the mortgage broker competing for that borrower’s business. Many borrowers aren’t in a position to get a bank loan, but they may well be perfect candidates for an alternative lender. What broker isn’t interested in exploring that opportunity? Best of all, traditional banks, in some cases, will help you pursue that opportunity as a broker.
When unable to initiate a loan internally, bankers still want to see their small-business borrowers successfully attain the capital they need to grow. By forming relationships with bankers, commercial mortgage brokers can find a healthy flow of lending leads as these situations develop. Prove that you can make bankers look like superstars to their customers by finding them financing, even if it’s through alternative lenders, and you’ll reap great benefits.
• • •
With a pro-business administration in Washington, D.C., strong consumer and investor optimism, and continued low unemployment and low fuel costs, the state of the U.S. economy makes now a good time to grow a small business. Alternative lenders can be the perfect option for helping to finance that growth. If you offer alternative lending options as a commercial mortgage broker, take heed and make hay while the sun is shining brightly.